OECD tax burdens on wages rising without tax rate increases

14/04/2015 - Taxes on wages have risen by about 1 percentage point for the average worker in OECD countries between 2010 and 2014 even though the majority of governments did not increase statutory income tax rates, according to a new OECD report.

Taxing Wages 2015says the tax burden has increased in 23 OECD countries and fallen in 10 during this period.

Most of the increased tax has resulted from wages rising faster than tax allowances and credits. In 2014, only seven countries had higher statutory income tax rates for workers on average earnings than in 2010, and in six countries they were lower.

In 2014, the tax burden on the average worker across the OECD increased by 0.1 of a percentage point to 36.0%, even though no OECD country increased its statutory income tax rates on the average worker. The tax burden increased in 23 of the 34 OECD countries, fell in nine and remained unchanged in two.

Taxing Wages 2015, provides cross-country comparative data on income tax paid by employees as well as the associated social security contributions made by employees and employers; both are key factors when individuals consider their employment options and businesses make hiring decisions.

The tax and social security contribution burden is measured by the ‘tax wedge’ - or the total taxes paid by employees and employers, minus family benefits received as a percentage of the total labour costs of the employer.

This year’s report contains a special chapter on labour income in five major non-OECD economies: Brazil, China, India, Indonesia and South Africa. The analysis shows that there is significant variation between these countries. In 2013, tax wedges in Brazil and China for the average single worker were similar to those observed in many OECD countries. In contrast, employees in India, Indonesia and South Africa faced tax wedges that were much lower than in the vast majority of OECD economies.

The mix of labour taxes also varies across these non-OECD countries with social security contributions comprising the bulk of the tax burden measures for the model households that are covered in four of the five countries, with South Africa being the exception.

One of the most striking findings of this analysis is that unlike the vast majority of OECD countries, family payments play very little or no role in reducing the tax burden on workers with children in these non-OECD economies.

Other key findings in the report:

Tax burdens continued to rise in 2014

The highest average tax burdens for childless single workers earning the average wage in their country were observed in Belgium (55.6%), Austria (49.4%), Germany (49.3%) and Hungary (49.0%). The lowest were in Chile (7%), New Zealand (17.2%), Mexico (19.5%) and Israel (20.5%).

Across OECD countries the average tax and social security burden on employment incomes increased by 0.1 of a percentage point to 36.0% in 2014. This followed rises of 0.2, 0.1 and 0.5 percentage points in the three years since 2010. These rises reversed the decline from 36.1% to 35.1% between 2007 and 2010.

Personal income taxes were the main contributor to an increasing total tax wedge in 18 of the 23 countries with an increase. The largest increase was in Ireland (+1.1 percentage points) where a higher proportion of earnings was subject to tax as the statutory tax rates, thresholds and basic tax credit amounts remained unchanged since 2011.

Personal income taxes and employer social security contributions were the primary factors in countries where the tax wedge fell. The only country with a decline of more than one percentage point was Greece (-1.2 percentage points) due to decreasing employer social security contributions (-0.9 percentage points). The overall employer social security contribution rate was reduced from 27.46% to 24.56% from July 2014.

Tax burdens in families with children

The highest tax wedges for one-earner families with two children at the average wage were in Greece (43.4%), Belgium (40.6%) and France (40.5%). New Zealand had the smallest tax wedge for these families (3.8%), followed by Chile (7%), Switzerland (9.8%) and Ireland (9.9%). The average for OECD countries was 26.9%.

Due to reduced family income supplement and frozen basic family benefit payments, Ireland saw the largest increase in the tax burden for one earner families with children (+1.5 percentage points) compared with a 1.1 percentage points increase for the single average worker.

In all OECD countries except Chile, Greece and Mexico, the tax wedge for workers with children is lower than that for single workers without children. The differences are particularly large in the Czech Republic, Germany, Ireland, Luxembourg and Slovenia.

Tax burden on labour income in Brazil, China, India, Indonesia and South Africa

The tax wedge figures for the single average worker in 2013 were between 33% and 34% in Brazil and China (where the modelling focuses on Shanghai); slightly below the OECD average of 35.9%. The corresponding averages in India, Indonesia and South Africa, ranging from zero to 14.3%, were low compared with the vast majority of OECD countries.

In Brazil, China, India and Indonesia, the average worker pays little or no income tax and the employer social security contributions component forms 70% to 80% of the tax wedge. In South Africa, the picture is different, where personal income tax as a percentage of total labour costs (11.4%) is just 2 percentage points below the OECD average and comprises around 80% of the total tax wedge.

In contrast with the OECD average, the presence of children has little or no effect on the tax burden in these non-OECD countries. In most cases, working families with children face the same tax wedge as their childless counterparts. The exception is Brazil, where the second earner with 33% of the average wage receives the “salário família”, reducing the tax wedge slightly.

Non-tax compulsory payments

In some countries a range of insurance-related benefits are provided through compulsory payments to privately-managed pension funds or insurance companies rather than through payments of social security contributions to government. More information on these “non-tax compulsory payments” is included in the OECD Tax Database.